The Ultimate Guide to Inheritance Tax

We have had some form of tax/death duty in the UK since the 19th Century.

Inheritance tax is payable on three main occasions; deaths and gifts made during your lifetime. This might be an outright gift or a lifetime gift to a trust or company.

Inheritance Tax is not a popular tax. My clients often ask whether there are any savings to be made. Some recent studies have suggested that not many people are aware of the allowances. i.e., how much can you leave before inheritance tax kicks in. If you are an executor dealing with the administration of an estate, you need to be aware of the allowances you can claim.

Here is a breakdown of what you need to know.

The rate of inheritance tax is 40% after any allowances. Each person has an individual allowance of ￡325,000, known as the Nil Rate Band (“NRB”). For example, if you die with assets above this amount then you will pay some inheritance tax.

Then, there is the additional allowance if you own, or part own a property and you are leaving this to your children (or other remoter descendants); you have an additional allowance of ￡175,000. This is known as the Residence Nil Rate Band (“RNRB”).

In order to qualify for the Residence Nil Rate Band you need to meet the following criteria: -

1.????Qualifying residential interest

2.????Closely Inherited

?Qualifying residential interest

This is an interest in a dwelling house which has at any time been the deceased’s residence and forms part of the deceased’s estate

Closely Inherited

The qualifying residential interest must pass to a child, grandchild, or other lineal descendants. This might be outright or on certain types of trust – but NOT a discretionary trust.

Lineal descendants are children, step- children, adopted children, foster children, or children where deceased appointed as guardian. They can also be a current spouse or civil partner of a lineal descendant.

It may also be a Widow, widower, or surviving civil partner of a lineal descendant who predeceased the deceased. However, this will not apply if they have remarried or were in a civil partnership before the deceased died.

If you are married or in a civil partnership, then anything you leave to your spouse or civil partner is exempt from inheritance tax. ?If you are a surviving spouse or civil partner you can transfer any unused allowances from the first to die to benefit your own estate.

This is known as the Transferable Nil Rate Band (“TNRB”) and applies to deaths after 9th October 2007. The maximum increase is 100% of NRB of the spouse or civil partner who died first.

In addition, any unused RNRB can be claimed by a surviving spouse – even if first spouse died before 6th April 2017.

Tapering

If the estate is valued at ￡2 million or more then the RNRB is reduced by ￡1 for every ￡2 over the ￡2 million threshold.

Downsizing allowance

After 8th July 2015 if the deceased had downsized prior to death OR sold the property, for example, to move into a care home it may still be possible to claim if the property would have qualified for the RNRB and any replacement property or sale proceeds are being left to lineal descendants.

When is inheritance tax due?

Inheritance tax is due within 6 months from the end of the month of the date of death. For example, if somebody died on the 2nd April then the inheritance tax needs to be paid by the 31st October.

Paying the inheritance tax before the grant of representation is obtained can be problematic because access to the deceased’s assets before the grant is not always possible. However, you can pay inheritance tax in instalments?in certain circumstances.

Paying the tax in instalments

If you have unsold property (land and buildings) or certain other assets/business assets in an estate, these attract the instalment option.

The most common situation will be the deceased’s house. ?You pay over ten equal annual payments to HMRC. The first instalment is due within the usual deadline for inheritance tax payments, i.e., 6 months from the end of the month of death.

If you have other assets in the estate, then the inheritance tax on those assets is due within 6 months from the end of the month of death.

You must choose to pay in this way by selecting the option on the IHT400 Inheritance Tax Account. Interest is usually payable on instalments, with some exceptions. Once you have sold the property the full amount of inheritance tax becomes immediately due.

If you can, you can still pay the full amount all at once. Instalments are useful if you cannot release money from the estate before the Grant or if a property is the main asset.

Potentially Exempt Transfer

As mentioned above, inheritance tax is payable on certain lifetime gifts. For example, a gift made during lifetime will be chargeable to inheritance tax if the Donor of the gift dies within 7 years of the gift.

This is known as a PET and is subject to allowances, exemptions and reliefs. The recipient of the gift, often known as the Transferee is primarily liable for any inheritance tax due on the gift, if the donor of the gift dies within 7 years of the gift.

It is the death of the donor that triggers a possible charge to tax. The NRB is applied first so that the first ￡325,000 is taxed at 0% (taking into account any other gifts made in the previous 7 years from the date of the gift). Thereafter, inheritance tax is payable at 40%.

Tapering relief

If the donor survives for more than 3 years any tax payable as a result is reduced as follows: -

80% of tax due if within 3 – 4 years before death

60% of tax due if within 4 – 5 years before death

40% to tax due if within 5 – 6 years before death

20% of tax due if within 6 – 7 years before death

Lifetime Chargeable transfer

The other occasion when inheritance tax is payable in respect of lifetime gifts and transfers is a transfer into any trust other than a disabled persons interest trust (on or after 22 March 2006) or to a Discretionary Trust or company (whether that is before, on or after 22 March 2006)

Once again, the first ￡325,000 is taxed at 0%, i.e. the available NRB is reduced first taking into account any other lifetime transfers in the previous 7 years of the date of this gift.

Thereafter, inheritance tax is payable at 20%. This is then recalculated if the donor of the gift dies within 7 years at 40%.

Once again, it is subject to allowances, exemptions and reliefs and tapering relief applies. A credit is applied for any inheritance tax already paid, i.e., at 20% as explained above.

Exemptions and Reliefs

There are various exemptions and reliefs in respect of inheritance tax, some of which have been explained above. These are usually separated into those that apply on death, those that apply on lifetime gifts/transfers and those that apply only on death.

On death and lifetime gifts

These are:

1.????Spouse/Civil Partner Exemption

2.????Charity Exemption

3.????Business Property Relief – must have been owned for the last two years (before the transfer if lifetime, or 2 years prior to death).

Business Property Relief is a 100% reduction on a business or interest in a business and unquoted shares and a 50% reduction on quoted shares which gave control of the company, certain land, machinery, and buildings used in the company or partnership.

If it is a lifetime gift and the transferor dies within 7 years after the transfer then Business Property Relief is only available if the transferee still owns the business property (or replacement business property which also qualifies for the relief). Otherwise, it will be a PET.

4.????Agricultural property relief - In general - 100% of the agricultural value of the property including land, farmhouses and farm buildings that are occupied ‘for the purposes of agriculture’, i.e. used for farming.

Lifetime Exemptions

These are:

1.????Annual = ￡3,000 per tax year

2.????Small Gifts of ￡250

3.????Gifts of Normal expenditure out of income

4.????Gifts on Marriage or entering a civil partnership. The amounts are below and depend on the relationship.

a. ￡5,000

b.￡2,500

c. ￡1,000

On death only

The Residence Nil Rate Band (“RNRB”) applies only on death.

Let us bring all this together and look at an example.

John-Paul makes a cash gift to his nephew, Stuart, on the 9th of April 2021 of ￡150,000. John-Paul makes use of his annual exemption every tax year.

John-Paul has made a PET. If John-Paul survives until 9th April 2028, the PET will be completely exempt.

John-Paul dies on the 10th of May 2022. His estate consists of a house valued at ￡300,000 and bank accounts of ￡50,000. Again, assume John-Paul continued to use his annual exemption. John-Paul has never married or been in a civil partnership. His Will divides his estate between his two nieces, Sara, and Zoe, who are both 32. John-Paul has not made any other chargeable transfers or PETs.

To calculate the inheritance payable in respect of John-Paul’s death estate: -

NRB = ￡325,000 ???????

less

PET = ￡150,000 (which has now become chargeable)?

?

To calculate the inheritance tax payable in respect of John-Paul’s death estate: -

NRB = ￡325,000 ???????

less

PET = ￡150,000

= ￡175,000 still available from NRB

?

Death estate = ￡350,000 less

???????????????????????￡175,000

?

= ￡175,000 x 40% = ￡70,000 IHT payable (payable by John-Paul’s PRs from the estate)

The RNRB is not available as the house is not being left to lineal descendants.

I hope you have found this article useful. Comment below about your thoughts on inheritance tax. I would love to hear from you.

About the Author

For 15 years, Scott has been helping clients to achieve peace of mind and to deal with the practicalities of death and old age. He has built up a wealth of experience in Wills and Probate helping individuals, professionals, and business owners protect their families, assets, and businesses.

Scott is a Consultant Solicitor at Richard Nelson Solicitors. He made the career move so that he can serve his clients flexibly by providing a safe and inclusive space. Scott is determined to create a better client experience and help his clients achieve the peace of mind they deserve.

Scott is passionate about helping his clients and understands the need for sensitivity and to listen to his clients’ needs at what can be a stressful and upsetting time.

Connect with Scott on Linkedin, if you aren't already. If you want to find out more about inheritance tax, learn more about planning your affairs and all things Wills, Probate and Lasting Powers of Attorney, or want to work with Scott, the first step is to book a call which you can do here: https://calendly.com/scottwalker-solicitor

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